Financing a business

Whether your business is established and looking for an injection of cash or you are a start up and hoping to get additional support securing funding to help your business develop begins with careful thought and detailed planning.

Whether your business is established and looking for an injection of cash, or you are a start up and hoping to get additional support, securing funding to help your business develop begins with careful thought and detailed planning.

Ways to help you understand the businesses needs can be to complete a financial forecast or sales plan. Completing a financial forecast or sales plan can help you to understand your businesses aims and objectives.

Knowing where to access funding isn’t always easy, but by identifying where and why your business needs an injection of cash to continue growing, you will help to narrow down the search. Having a clear and concise financial forecast will enable you to feel confident when pitching your idea to potential investors.

you’ll own a smaller share of your business (although your share could eventually be worth more money if your business succeeds)

you may have to consult your investors before making certain management decisions

only limited companies can sell shares, so you can’t raise money in this way if you’re a sole trader or in a partnership

Crowdfunding

Crowdfunding (also known as crowd financing or crowd-sourced capital) involves a number of people each investing, lending or contributing smaller amounts of money to your business or idea. This money will then be pooled to reach your funding target.

Your idea will usually be showcased through a crowdfunding website.

Advantages

Advantages of crowdfunding include:

it provides an alternative to funding from conventional means, eg bank loan

you can raise finance relatively quickly, often without upfront fees

it can raise awareness of your new business

Disadvantages

Disadvantages of crowdfunding include:

your idea could be copied if you haven’t protected it with a patent or copyright

any money you raise will normally be returned to investors or contributors if you don’t reach your funding target

crowdfunding is mostly unregulated (but from 1 April 2014, loan-based and investment-based crowdfunding will be regulated by the Financial Conduct Authority)

Loans

A loan is credit, usually in the form of cash, that you borrow and repay over an agreed length of time. Banks, community development finance institutions,other businesses and even friends and family can provide businesses with loans.

As well as repaying the amount you’ve borrowed, you normally have to pay interest on a loan. The amount will depend on:

how long you need the loan for

how much you borrow

whether the loan is ‘secured’ – eg if you own your home and agree to transfer ownership to the loan provider if you don’t keep up your payments

other factors, like the Bank of England base rate

The interest rate may be:

fixed, so it won’t change for the length of the loan

variable, so it will change with the Bank of England base rate or the bank’s cost of borrowing

Reasons for getting a loan

Loans are generally suitable for:

paying for assets – eg vehicles or computers

start-up capital

instances where the amount of money you need won’t change

Advantages

Advantages include:

unlike overdrafts, loans are not repayable on demand – this means that you’re guaranteed the money for the whole term (generally 3 to 10 years)

loans can be tied to the lifetime of equipment or other assets you’re borrowing the money to pay for

you won’t have to give the lender a percentage of your profits or a share in your company

Disadvantages

Disadvantages include:

loans aren’t very flexible – eg you may have to pay charges if you repay early

you might struggle to meet monthly payments if your customers don’t pay you

if your loan is secured against your personal property or assets (eg your home) you could lose them if you don’t keep up the payments

the cost of repayments for variable rate loans can change, making it harder to plan your finances

When you raise an invoice, the invoice financier will buy the debt owed to you by your customer.

They make a percentage of the cost (usually around 85%) available to you upfront.

They then collect the full amount directly from your customer.

Once they’ve received the money from your customer, they make the remaining balance available to you.

You’ll have to pay them a discount charge (interest) and fees – the amount depends on which invoice financier you use.

Example
You’re owed £40,000 by a customer. You sell the invoice to an invoice financier for £34,000 (85%). They collect £40,000 from your customer and pay you the remaining £6,000 when they receive the money. You pay them interest and any fees you owe.

Invoice discounting

With ‘invoice discounting’, the invoice financier won’t manage your sales ledger or collect debts on your behalf. Instead, they lend you money against your unpaid invoices – this is usually an agreed percentage of their total value. You’ll have to pay them a fee.

As your customers pay their invoices, the money goes to the invoice financier. This reduces the amount you owe, which means you can then borrow more money on invoices from new sales up to the percentage you originally agreed.

You’ll still be responsible for collecting debts if you use invoice discounting, but it can be arranged confidentially so your customers won’t find out.

Advantages

Both kinds of invoice financing can provide a large and quick boost to your cash flow.

Advantages of factoring include:

the invoice financier will look after your sales ledger, freeing up your time to manage your business

they credit check potential customers meaning you are likely to trade with customers that pay on time

they can help you to negotiate better terms with your suppliers

Advantages of invoice discounting include:

it can be arranged confidentially, so your customers won’t know that you’re borrowing against their invoices

it lets you maintain closer relationships with your customers, because you’re still managing their accounts

Disadvantages

Some disadvantages of invoice financing are that:

you’ll lose profit from orders or services that you provide

invoice financiers will usually only buy commercial invoices – if you sell to the public you might not be eligible

it may affect your ability to get other funding, as you won’t have ‘book debts’ available as security

If you use factoring:

your customers may prefer to deal with you directly

it may affect what your customers think of you if the invoice financier deals with them badly

Leasing and asset finance

Advantages

Advantages include:

you’ll have access to a high standard of equipment that you might not have been able to afford otherwise

interest rates on monthly instalments are usually fixed

it’s a less risky alternative to a secured bank loan – if you can’t make payments you’ll lose the asset but not, for example, your home

the leasing company carries the risks if the equipment breaks down

as long as you make regular repayments for the period of the lease, the agreement can’t be cancelled

it’s widely available

Disadvantages

Disadvantages include:

you can’t claim capital allowances on a leased asset if the lease period is less than 5 years (or 7 years in some cases)

it can be more expensive than buying the asset outright

some long-term contracts can be difficult to cancel early

you may have to pay a deposit or make some payments in advance

If you have an idea for an innovative product or service, you can get help from Innovate UK to develop it and make it successful.

You can get technical help and access specialist facilities. You can also get expert knowledge from universities and research organisations.

Innovate UK provides opportunities to help you network, share ideas and find project partners. You can get support to work with international partners, major businesses and government. This support is available for all UK based companies. You can also get help from some programmes if you are an individual or an organisation.

When considering growing your business look into the different opportunities that may be available in your area, is there a grant to support with growth or innovation vouchers to access professional services through a local university? Rather than renting an office that might stretch your budget have you considered utilising Business Incubation Spaces to help keep the costs down.

Get business support and advice over the phone through the National Business Support Helpline on 0300 456 3565 or chat live with an advisor Monday to Friday, 9am to 6pm or call your local Growth Hub on 01702 417765

Cookies

This site uses cookies for analysis purposes only. This helps us understand how you and other visitors use our site. To see a complete list of these cookies or to opt out please access our cookie policy page. You will see this message only once, but you will be able to find more information about our use of cookies or opt out at any time. Find out more.